How to set up a portfolio that best manages market decline

The recent volatility of the stock market has many investors nervous about their funds. Not only that, but people who were considering investing in the stock market have been turned off by the timing for fear of losing money.

But even with the large dips in the stock market that have occurred lately, you can still set up a portfolio that can manage the market decline and weather the financial storm our country has been faced with lately. One thing that is important to remember is that the stock market should be viewed with a long-term perspective, meaning that instead of focusing on the day to day performance, you should keep in mind that volatility is common and typically smoothes over.

The following are some ways you can set up a portfolio that will help you to manage the market decline:

Know your financial goals.
It is important that you are familiar with your investment portfolio and that it closely matches your overall financial goals. Things that need to be taken into account include short and long term financial planning, your risk tolerance, and the amount of money you want to invest. Once you know these things, you can then begin building a portfolio that will not only reach your goals, but will be able to manage market declines.

Keep a diversified portfolio
You've probably heard the importance of diversifying your portfolio over and over again, but there's a reason for that - a diverse investment portfolio is one that will best manage market declines. By not putting all your eggs in one basket, as the saying goes, you will take less of a hit if a certain market sector declines.

Being diversified doesn't mean owning different investments that all do the same thing, but instead owning domestic and foreign stocks, bonds, commodities, and stocks within different sectors. It is also possible to be too diversified; too many mutual funds or stocks can also make it difficult to meet your investing goals and make you more susceptible to losing money in a market decline.

This also means putting your equity in both short-term as well as longer (but riskier) investments. Always take your risk tolerance in account before investing.

Consider hedge funds
Hedge funds are invested in by a wide range of people and organizations for the purpose of minimizing their overall risk in investments and increasing their rates of return. Hedge funds are a sophisticated form of investing, so make sure you understand them thoroughly, or seek the advice of an investment adviser, before proceeding.

Hedge funds are said to be managed by the best in the investment business, typically because of the fact that the fund managers' pay is based on large performance incentives. Hedge fund managers also usually have their own money invested in the fund they are managing as well, which is even more incentive to do well.

When in doubt about setting up a portfolio, it's always a good idea to speak with someone who is familiar and experienced with the market and with investing, such as a broker or investment adviser.

Even with the uncertainty of the stock market, you can and should still invest-but you should do so cautiously and make sure you are well informed. These are just a few ways you can set up a portfolio that best manages market decline.